Starbucks will close 600 stores

Starbucks Corp. said Tuesday it will close 600 company-operated stores in the next year, up dramatically from its previous plan for 100 closures – a sign the coffee shop operator continues to struggle with the faltering U.S. economy and its own rapid expansion.

The 500 additional stores set to be closed had been on an internal watch list for some time. They were not profitable and not expected to be profitable in the foreseeable future, and the “vast majority” had been opened near an existing company-operated Starbucks, Chief Financial Officer Pete Bocian said in a conference call.

The shops are located in “all major U.S. markets,” the company said without elaborating. Florida and California are among the largest states affected, spokeswoman Valerie O'Neil said in an interview. Seventy percent of the stores to be shut are less than 3 years old, the company said.

About 12,000 workers, or 7 percent of Starbucks' global work force, will be affected by the closings, most of which are expected to take place between late July and the middle of 2009, O'Neil said.

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Most of the employees will be moved to nearby stores, but O'Neil said she did not know exactly how many jobs will be lost.

Starbucks' sales and earnings have declined as cash-strapped consumers facing record gasoline prices pull back on gourmet coffee and other luxuries. However, the company has also doubled in size in the past four years, and some analysts wondered whether its explosive growth would come back to haunt it as the market became saturated.

Before Tuesday, the company avoided acknowledging that saturation was an issue, and pinned weak financial results and adjustments to new store openings on the economy. In May, Starbucks said its second-quarter profit sank 28 percent as U.S. consumers cut back on visits in light of rising food and gas prices.

Bocian said during the conference call that between 25 and 30 percent of a Starbucks shop's revenue is cannibalized when a new store opens nearby, and that the closures should help return some of that revenue to the remaining stores.

There aren't a material number of stores left on the watch list, Bocian said.

Tuesday's announcement shows CEO Howard Schultz, the 54-year-old former CEO who regained the post in January, is coming to grips with Starbucks' declining earnings and the “overgrowth” of the past four years, said Matthew DiFrisco, an analyst at Oppenheimer & Co. in New York.

“It shows Schultz is willing to do the tough things that are necessary,” said James Walsh, an analyst at Coldstream Capital Management Inc. in Bellevue, Wash.

Starbucks also Tuesday cut the number of company-operated stores it will open in fiscal 2009 in half, to fewer than 200. The company did not adjust its plan to open fewer than 400 stores in 2010 and 2011.

As of the end in March, there were 16,226 Starbucks stores around the world, including 7,257 company-operated stores in the U.S.